In his State of the Union address, President Bush promised to keep health care affordable, which is a great media sound bite. But policymakers need to remember that our current health care crisis is largely the product of decades worth of public policies designed to limit consumer exposure to health expenses.

Third-party spending has helped make buying health insurance on the open market unaffordable for even middle class Americans. In fact, if more consumers spent more of their own money for routine care, true health insurance for catastrophic illness would be cheaper.

Since most consumers receive health coverage through pre-tax, employer-provided health insurance, employers have an incentive to get as much bang for the tax-free buck as possible, with lavish plans that offer a cornucopia of services with low, typically $10 or $15, deductibles but high employer-paid premiums. This means that employees are encouraged to use their insurance for relatively minor aches and pains which they could easily pay for themselves out of pocket.

This arrangement defies the true purpose of insurance, which is to hedge exposure against high-cost, low probability events. Car insurance, for instance, doesnï¿½t pay for gasoline or tune-ups. Homeowners insurance doesnï¿½t pay for someone to trim your lawn or clean the gutters. Gold-plated, third-party health care coverage (remember the $15 copay) encourages doctors and patients to overuse medical resources that are of little medical utility.

Cheap, subsidized health care for some leads to very expensive health care for others. When large businesses use their clout to bargain for discounts with insurers, insurers turn around and push for discounts from pharmaceutical companies, hospitals and physicians. Americans who arenï¿½t covered by employer-provided insurance, and who donï¿½t qualify for government-funded health care through Medicare or Medicaid, are stuck paying full price for hospital care, doctor visits, and prescription drugs.

Government, in fact, is one of the prime offenders when it comes to cost shifting. Policymakers like to crow about the cost-effectiveness of Medicare and Medicaid compared to private plans, but the reality is that government-imposed price controls just shift billions of dollars in costs from the public to the private sector. The President wisely recognizes that having consumers reach into their own pockets for routine health care expenses will help bring sanity to the system. By giving consumers tax breaks for insurance premiums and out-of-pocket spending linked to HSAs, individuals can buy insurance with the same tax leveraged dollars that companies do. Since HSAs are investment vehicles, consumers will still have an incentive to shop for the best values and build nest eggs against future health care costs. With these incentives in place, the President estimates that 21 million Americans will have HSAs by 2010.

The Presidentï¿½s proposal to create a national market for health insurance is also a vital policy change. National markets would free individuals and small businesses from state insurance mandates that drive up the costs of health insurance. Special interest groups, like chiropractors, lobby state legislatures to make coverage for their services mandatory, thus driving up the cost of every insurance policy sold in that state.

Each consumer could decide if he or she really wanted a health care plan that covered chiropractor or podiatrist services, or substance abuse programs. Critics who argue that this would create a ï¿½race to the bottomï¿½ ignore the fact that each state would have a built-in financial incentive to offer responsible insurance regulations to attract as much out of state business as possible.

Adverse selection is a potential problem in having consumers choose their own plans, but one that the market can find ways of solving through high-risk pools or having the government offer subsidies based on health status to insurers who cover chronically ill patients.

While HSAs and other tweaks to the insurance system will make health care more affordable, what the system ultimately needs is to reward providers based on quality measurements. Today, payment in our health care system is largely fee-for-service, which rewards providers handsomely for high tech, high cost interventions. Compensation for routine or preventive care is often meager or non-existent. David Cutler, an economist at Harvard University, hits the nail on the head: ï¿½The ideal medical care system would encourage services with high value and discourage services with low value.ï¿½

What we have now is basically the opposite of the ideal system.

State Medicaid programs, for instance, often ration access to expensive new drugs based on their cost, not whether those same drugs save money by keeping patients healthy and out of hospital beds and emergency rooms. Medicare spending varies widely from state to state, with no apparent link between higher spending and better outcomes. Unlike every other industry in America, where increased productivity drives lower costs, third-party payers tend to focus on line-item spending at the expense of the big picture, hoping that someone else will have to pick up the check.

The President and other market advocates recognize that only consumers can really identify and pay for health care value because their own wallets and well-being are on the line. In the field of cosmetic surgery, for instance, prices are falling even as more Americans opt for breast enlargements and tummy-tucks, because plastic surgeons compete with each other to offer better services at cheaper prices. Doctors also gravitate to cosmetic surgery because of the paucity of regulations and the fact that consumers pay directly out of pocket, allowing them to avoid insurance gatekeepers. Where the market rules, physicians and consumers are happier with the results.

The Presidentï¿½s plans wonï¿½t significantly reduce spending on the most expensive, chronically ill patients; but this is largely because there isnï¿½t a market yet for tomorrowï¿½s health care entrepreneurs. If we build the framework for that market, they will come.